September 11, 2007

What is average?

Economics uses a lot of numbers -– income, sales, jobs, taxes, spending. And often these numbers are expressed as averages. But N.C. State University economist Mike Walden notes that there are things to watch for when you hear a number for average income or average spending.

"Any statistician will tell you there are actually a number of different meanings and measures of average. When most people hear the term avera'e they think of something called the mean," says Dr. Walden, a professor of agricultural and resource economics. "Let's take income. Let's say we want to calculate average income for 100 households. Well, the mean will be to simply add up all the income of those 100 households and then divide by 100. And that would give us the mean household income.

"The problem with that is it can be influenced by extreme values. You could have one of those 100 households earning a billion dollars, and everyone else earning a thousand dollars, and the mean would look relatively high," he says, "but it certainly wouldn't connote any indication of what's average among all those 100 households.

"So another average that people have come up with is the median. The median is the midpoint of the income distribution, to continue with our income example," he says. "Let's say we had a median income of $50,000 -- that means half the households would earn more than 50; half would earn below 50.

"So economists tend to like median averages –- median income, median wages, median spending," he concludes, "And indeed, median income -- if we are going to again continue with income -- tends to be much lower than mean income, right now about $10,000 lower for households."